Cofounder's Renunciation of US Citizenship Unlikely to Hurt Facebook IPO

Eduardo Saverin's decision to give up his U.S. citizenship as the company he helped found is poised to go public isn't likely to become part of the long-term Facebook story -- that is, unless things start to go south for the social network giant. If Facebook should become tarnished due to other causes, though, it could become part of a negative narrative, said David Johnson, principal with Strategic Vision.

By Erika Morphy
05/14/12 12:06 PM PT

Facebook cofounder Eduardo Saverin, a Brazilian native who is currently a resident of Singapore, has given up his U.S. citizenship.

The widely-held assumption is that Saverin wanted to escape the tax liability he would assume from the Facebook initial public offering, expected as early as this week, by becoming a citizen of Singapore.

Through statements made by representatives in the media, Saverin has denied that motivation, saying the move would make it easier to manage his affairs, many of which are now Asia-focused.

It is unclear how much Saverin will save by this move, if saving taxes is indeed a contributing reason. He still must pay a so-called exit tax on capital gains from any stock holdings, even if the shares are not sold. However, the taxes he will owe will be based on the value of Facebook before he renounced his citizenship, which arguably is much less as a private company than it will be when it goes public.

It is not entirely clear how much of a stake Saverin has in the company. He sued Facebook over this issue, and the matter was settled out of court. Securities filings from the Facebook IPO suggest his ownership comes to about 5 percent.

A Global Investment Strategy

Perhaps a more significant factor for Saverin is that Singapore does not have a capital gains tax, which could help him as he eventually exits his multiple international investments.

Saverin is invested in Asian, U.S. and European companies and has plans to invest in Brazilian companies targeting Asia, spokesperson Tom Goodman has told reporters . It may be that Saverin is thinking about the long-term global tax savings he could realize with this move.

Snubbing the US

Regardless of his true reasons, Saverin is taking flak for what's viewed as a repudiation of all things American -- even though he is Brazilian by birth. Saverin's family
moved to the U.S. when he was a child, after his father, an industrialist in Brazil, learned there was a plan to kidnap his son for ransom.

He attended Harvard University, where he met Facebook CEO Mark Zuckerberg in his junior year and became one of the backers of the original Facebook developed in Zuckerberg's now-legendary dorm room. Later, Zuckerberg and Saverin disagreed over Facebook's direction, which led to their falling out.

Facebook's Reputation

Saverin will likely be just a footnote in Facebook's corporate history when all is said and done. A more immediate question for the company is how news of his Singaporean citizenship could hurt Facebook as it goes public.

It probably won't hurt much, if at all, said Paul Levinson, professor of communication and media studies at
Fordham University.

"Facebook is an inherently global community, so the specific citizenship of one of its founders is not really an issue," he told the E-Commerce Times.

"Further, even if it was, Zuckerberg -- not Saverin -- is the one name most people associate with Facebook, so although Saverin giving up his U.S. citizenship is certainly interesting, it will not cause any major tidal waves in the Facebook story."

That appears to be true right now, at any rate, said David Johnson, principal with Strategic Vision.

"This is not a major PR debacle at the moment, and media spotlight is turning back to the IPO again," he told the E-Commerce Times.

However, this incident could come back to hurt Facebook if it experiences a number of consumer complaints, becomes the focus of an unfavorable investigation by government or media, or winds up causing investors to lose a lot of money, Johnson continued.

"Then it could become part of a negative narrative about Facebook," he said.

Facebook declined to respond to our request to comment for this story.